By Henry Boyo
Petroleum marketers announced, in their communiqué of 29th August, 2017, that they would commence mass retrenchment, unless government pays over $2bn outstanding invoices, and also settles their interest charges, on delayed payment and related exchange rate differentials. Nonetheless, in order to pay, government’s present lean revenue expectations may compel the need, to additionally borrow N720bn domestically or $2bn externally and oppressively compound the already crippling deficit of N2.32tn in the N7.4tn 2017 budget.
Evidently, confusion still trails the flip-flops in government’s failed attempts to remove subsidy and deregulate petrol pricing. However, the outstanding $2bn subsidy debt by July, may rise, alarmingly beyond $4bn (N1.4tn) before December 2017, if petrol price remains at N145/litre; consequently, fuel subsidy will voraciously consume over 20 percent of 2017 budget! Furthermore, in a Punch newspaper report of 24/8/17, the Fiscal Responsibility Commission, confirmed that this administration illegally withdrew over N359bn from the Excess Crude Account to fund subsidy in 2015.
The above title “Is Petrol Still Subsidized”, was first published on 31st October 2016; sadly, the question posed still remains, officially unanswered: please read on:
“Petroleum Minister, Dr. Ibe Kachikwu, informed newsmen in Abuja, on 17 December, 2015, that Government would focus on modulation of petroleum product prices to ensure efficiency and optimal supply of products; price modulation, according to the Minister, has nothing to do with the removal or existence of subsidy.”
The Minister also explained that price would no longer be fixed, as crude oil price would continue to determine the price of petrol. Kaichukwu, however, dismissed speculations that pump price would go back to N97/litre in 2016, but, added however, that a band between the discounted N87 and the former N97/litre might be adopted. Evidently, sadly, at this stage, the Hon Minister probably did not fully recognize that Naira exchange rate is actually a prime determinant of domestic petrol price.
However, on 11th May 2016, after almost 5 months of social anguish induced by acute fuel shortage, Vice President, Yemi Osibanjo, announced a new pump price of N145/litre. Government also expressed optimism that the new price would lead to improved supply, and stimulate competition and eventually drive down prices.
The N145/litre price according to Kachikwu, was predicated on a projected rate of N280=$1, to encourage private sector fuel imports. However, barely 2 weeks after this announcement, CBN introduced its flexible exchange rate regime, which pushed Naira rate above N300/$, even when crude oil price remained very low and stable around $40/barrel; invariably, profit margins became eroded to make N145/litre impractical for third party importers. Ultimately, the over N150/$ gap between official and parallel exchange market rates will simply push the official rate well beyond N300=$1 and make N145/litre less attractive to importers.
Curiously, on 4th September 2016, an informal association of 9 former NNPC Group Managing Directors, expressed fears, via an NNPC press release, after a meeting with the Petroleum Minister, that the benchmark of N145/litre was “not congruent with the petroleum downstream liberalization policy, especially when foreign exchange and other price determining components, such as crude oil cost and NPA charges remain uncapped”.
Indeed, prior to this seemingly unsolicited intervention, some private marketers had similarly suggested, according to a Punch report of 07/08/2016, that “the actual or real cost of petrol was N151.87, if all pricing components are adequately captured”.
Furthermore to corroborate the private marketers’ observation, , NNPC GMD, Crude Oil marketing Mele Kyari, also stated, at an oil Expo in Lagos on 24th October 2016, that the sale of petrol at N145/litre was no longer sustainable as “it is impossible today to import products at the current fixed exchange rate”. Kyari therefore warned that the burden would become too heavy if the NNPC becomes sole importer of petrol.
However, in order to douse any public anxiety that Mele Kyari’s statement may have instigated, two days later, NNPC’s GMD, Public Affairs, Garba Deen Muhammed, quickly assured Nigerians, at a press briefing, that the pump price of N145/litre has not been increased. Muhammed confidently asserted that petrol shortage is impossible with the present, apparent “supply glut and the very robust stock and long term procurement contract that NNPC has established with suppliers”. When asked if NNPC was still subsidizing fuel, the GMD emphatically denied that “No, there is no subsidy”, and then explained that the current availability of PMS was a result of the “diligent application of commonsense” with price modulation, and also because prices were now determined by market forces.
So, the dilemma therefore is, that if GMD Mele Kyari does not publicly recant that he was in error for suggesting that the N145/litre price was not sustainable, and the 9 Ex NNPC GMDs do not also backtrack on their urgent recommendation to increase petrol price, who then, are we to believe on this issue of sustainable petrol price, supply and subsidy?
Nevertheless, if NNPC is compelled to become the sole importer as suggested by Kyari, while petrol is sold below cost price, then, the corporation’s financial accounts will inevitably look very ugly ultimately! Incidentally, Newspaper publications on forex usage have never shown NNPC as purchasing forex from commercial banks to fund its huge petrol imports. The critical question therefore must be, what Naira exchange rate applies when NNPC adopts in-house dollar income without NASS approval for its clearly substantial petrol imports.
The question Invariably is, “how much subsidy is NNPC presently giving away on each dollar allocated to its petrol imports to ‘artificially’ sustain the present N145/litre price; furthermore, how much of this subsidy payment is reflected as unappropriated expenditure, since provision for subsidy was conspicuously absent in the 2016 budget; furthermore, why has the National Assembly remained silent, as in previous years, on what is clearly a violation of the appropriation bill. Conversely if price & exchange rate subsidy have been eliminated with NNPC’s reportedly ‘commonsense’ price modulation strategy, then we should properly celebrate the Corporation’s ingenuity in hatching this enabling solution to the hydra headed fuel pricing issue.”
The above piece will be concluded with the following excerpts from another article titled “Fuel price, the bone in NNPC’s throat”, published in Punch and Vanguard editions of 25/07/16, see also www.lesleba.com.
“The deregulation of the petrol market will remain inchoate with severe market distortions, if price and the applicable Naira exchange rate for fuel imports remain centrally regulated. Evidently, unless the price cap for petrol is lifted, marketers will refrain from direct import, and NNPC may once again monopolise supply as sole importer to avert scarcity, even when this business is an unsustainable loss.”
Consequently, if price remains capped, while Naira further depreciates, ultimately we may require over N4bn/day (i.e. N1.5Tn annually), to fund subsidy on the estimated 40m litres daily consumption. Inexplicably, if crude oil price fortuitously rises beyond $50/barrel, the related increased revenue with Naira simultaneously inexplicably depreciating, will ironically instigate much higher fuel prices and bring back subsidy big-time!”
“However, a plausible resolution to the inflationary and oppressive consequences of rising fuel prices and the avoidance of oppressive subsidy values, even when crude price rising, will infact be a stronger Naira exchange rate. For example, if fuel importers could purchase dollar with N100=$1, fuel pump price may not exceed N100/litre; consequently, up to N45/litre (about N800bn annually from 40m litres daily consumption) can be recovered as petrol tax in place of about N1.5tn subsidy payments, if petrol price remains unchanged at N145/litre;”
“Nonetheless, the Naira rate will remain weak, if the self serving tradition of auctioning dollar rations in a market that is undeniably flushed with excess Naira liquidity is sustained.”
SAVE THE NAIRA! SAVE NIGERIANS!!